DHL official says its new express mail service in China is ‘perfectly legal’

Deutsche Post AG unit DHL's newly-launched domestic express mail delivery service in China is perfectly legal, as the country's postal regulations do not specifically prevent foreign firms from engaging in the business, a DHL official told AFX-Asia in response to recent local media criticism of its entrance into the local express mail delivery service sector.

DHL set up a unit in Shanghai on Monday to provide domestic express mail services nationwide, effectively becoming the first foreign company to break into the sector, which was previously reserved for local firms.

The move aroused criticism from local media, and several mainstream newspapers branded DHL as 'an irregular player', as none of the foreign freight forwarders have been officially allowed into the sector so far.

DHL, on the other hand, defended its move without hesitation, saying no law forbids it to enter the market.

'It's unjustified to accuse us of being 'irregular' as there is no written law or rules in China that specifically ban us from the business,' said an official with DHL's China operations.

He said DHL would respect the 500-gram barrier imposed in Feb 2002, even if it is no longer officially effective.

'The government had earlier prevented us from handling mail under 500 grams within the country and our new unit will only deliver parcels above 2 kilos.'

An official with China's State Post Bureau (China Post), which sets postal regulations and also dominates the domestic courier service market, chose his words carefully when contacted by AFX-Asia.

'I am not aware of DHL's move, I don't what to pass judgement, nor am I aware of any planned actions from our side against DHL,' said Zeng Wei, with China Post's rules and policy division.

The '500-gram barrier' that the DHL official referred to is a long-disputed issue between China Post and foreign express mail deliverers, according to industry insiders.

China Post issued a rule in Feb 2002 banning non-state express mail companies from delivering mail under 500 grams in the country, but had to drop it five months later amid unanimous opposition from global heavyweights, such as DHL, FedEx Corp (NYSE FDX), United Parcel Service Inc (NYSE UPS) and TNT Express.

Its latest attempt to include the '500-gram barrier' in the draft version of the amended Postal Law late last year, triggered another round of protests, and drew the Asian heads of the the fours firms to Beijing.

During their first ever joint visit to China, the Asian chief executives of DHL, FedEx, UPS and TNT, all members of the Conference of Asia Pacific Express Carriers (CAPEC), lobbied top Chinese officials, calling for further liberalization of the country's express mail services.

'We hope to see no additional restrictions in China's amended draft Post Law,' CAPEC executive director Ira Wolf told AFX-Asia in an earlier interview.

Even though there are no written rules or laws in place that specifically ban foreign freight forwarders from the domestic delivery service business, DHL, FedEx, UPS and TNT Express were in reality only allowed to offer international courier services in the country.

'DHL is taking advantage of a legal loophole this time, but it is careful enough not to get itself into trouble,' said Ma Ying, an analyst with Haitong Securities.

The firm has actually been quitely testing the waters in the domestic express mail business since last September, and has only made its move public lately. China Post, busy with its own restructuring and the Postal Law amendments, chose to keep silent about DHL's so-called 'irregularities', Ma said.

She expects to see other foreign firms following suit, even though FedEx, UPS and TNT all insisted they have no plans to do so in the near future, when contacted by AFX-Asia.

China Post, the courier service monopoly in the country 10 years ago, has already lost a whopping 62 pct share of the international forwarding service market to its global peers, industry analysts said.

DHL, via a 50-50 tie-up with Sinotrans Air Transportation Development Co Ltd (SH A 600270), has managed to occupy a 36 pct share of the market, with UPS holding an 8 pct share by joining forces with the same local partner.

FedEx has secured a 12 pct share of the market via an alliance with Datian W. Air Service Corp. TNT holds a 6 pct share of the market through cooperation with a local partner.

China Post scored better in the domestic courier service sector, and managed to maintain a 90 pct share, with the remaining 10 pct shared among around 1,000 small private courier firms.

Industry analysts expect to see China Post concede its market position further to foreign rivals on the international express mail service front in the coming years, but it will not find itself cornered, as demand for courier services keeps growing amid booming foreign trade.

China's exports surged 34.6 pct to a record 438.37 bln usd in 2003, with imports up 39.9 pct at 412.84 bln usd.

Exports in 2004 are expected to rise 15 pct year-on-year to 505 bln usd, with imports up 20 pct at 495 bln usd, according to an earlier forecast by the Ministry of Commerce.

'Life will not be miserable for China Post, as the pie is expanding continuously,' said Li Lei, an analyst with China Securities.

(1 usd = 8.3 yuan)